Compensation for wealth tax proposes cabinet for a multi-billion job

He did not miss the symbolism, said State Secretary Marnix van Rij (Fiscality) during a press meeting at the Ministry of Finance on Friday morning. On December 24, the day before Christmas, the Supreme Court ruled that the existing capital yield tax was unlawful. As a result, some of the savers and investors with assets in box 3 paid too much tax for years.

On Good Friday, the CDA member presented the possible solutions that the cabinet has devised for this problem. For the first time, he also gave a concrete glimpse into what a future-proof wealth tax could look like after 2025. The wealth tax as a political theme on both the birthday and death anniversary of Jesus Christ, the reformed tax specialist appreciated it.

Van Rij emphasized that the cabinet is faced with ‘difficult choices’ with regard to compensation. According to him, there is no ideal solution. In any case, the restoration of rights required to compensate savers and investors with assets in box 3 will cost billions. The total bill amounts to between 2.4 and 11.7 billion euros. The exact amount depends on a number of choices that must be made during two parliamentary debates on the subject next week.

The fact that the Supreme Court canceled the capital yield tax in box 3 at the end of last year, because this tax was based on a fictitious, assumed distribution of the capital. According to the Supreme Court, that was illegal. Wealthy Dutch people who mainly kept their money in a savings account paid relatively much tax, while their real return was virtually nil due to the low interest rate on savings. A group of more than 60,000 people successfully objected to the fictitious wealth tax.

Since then, the cabinet has been brooding on a solution to compensate the disadvantaged savers. On Friday morning, Van Rij presented the possible solutions that the cabinet envisions and which the House will debate on Tuesday and Wednesday.

Four possible scenarios

According to the state secretary, there are four possible scenarios, two of which the cabinet considers serious. Van Rij called the option to automatically repay all tax paid in box 3 to every Dutch person who had taxable assets in box 3 between 2017 and 2022. 2.7 million Dutch people would then receive a total of 26.5 billion euros back. Also according to the Supreme Court, not the entire group is entitled to compensation: those who invested the majority of their assets probably did not pay too much tax, because the actual return was higher than the fictitious one.

Van Rij also rejected the scenario in which the tax authorities will calculate the actual return on capital for each taxpayer with retroactive effect. According to him, this is “impossible”.

Two variants remain. In the first, which the government calls the ‘savings variant’, people with savings are taxed on the basis of the current savings interest rate, which has been zero in recent years. Investments are based on a multi-year average return, on which tax is due.

In the second workable option, the ‘fixed-rate variant’, the tax authorities use the average return per year for investments. According to Van Rij, this variant comes closest to taxing actual returns. The disadvantage is that this option is somewhat more laborious than the savings variant: in bad stock market years, investors may be entitled to compensation, while on a good stock market year they owe extra tax on paper – which, incidentally, does not have to be retroactive.

It costs billions anyway

The total costs for the restoration of rights vary widely depending on the choices made, says Van Rij. If only the group of 60,000 savers who objected are compensated and the tax authorities use the savings variant, the costs remain relatively limited. If disadvantaged taxpayers who did not object also receive compensation, the account in the savings variant will rise to 6.9 billion euros. And if the cabinet compensates all more than 2 million Dutch citizens who have filed a tax return in box 3 in recent years by using the fixed-rate variant, the costs will rise to almost 12 billion euros.

Van Rij did not want to express a preference on Friday: “We are now laying down the analysis and the solution direction, we will discuss this with the House.” He did point out that the House has adopted a motion calling on the cabinet to accommodate all disadvantaged savers, not just the group of objectors.

The CDA member also kept a low profile when asked where the money should come from. Prime Minister Rutte said at the weekly press conference on Thursday that the cabinet will probably be obliged to increase taxes due to several setbacks.

capital gains tax

The chosen compensation will also form the basis for the levy in the coming years, pending a new system that is due to come into effect on 1 January 2025. Van Rij also put the contours of the future wealth tax on the table on Friday. The old yield tax is a thing of the past, in the future the real yields on capital will become the starting point. no more fictions at the tax authorities.

The government has opted for a so-called capital gains tax, in which the actual growth (or shrinkage) of capital forms the basis for the taxation. A capital gains tax includes both income from capital (interest, dividend, rent) and capital gains (rise in share prices, appreciation of a second home). In that last step, he deviates from a capital gains tax.

According to the government, taxing capital gains has advantages over taxing capital gains alone. These are mainly due to the annual estimate and settlement of capital appreciation, even if it is not sold. According to the cabinet, a major disadvantage is that taxpayers can be confronted with a hefty tax bill in an exceptionally good year (significant capital increase), while they have too little ‘liquid assets’ to pay them (because the increased value of property is not sold). has been or is otherwise monetised).

The current assets in box 3 will also return in the new capital gains tax. Of the total assets of 470 billion in box 3 (in 2019), about half were bank and savings products. Investments made up about a quarter of assets, real estate another quarter. The first two categories are relatively easy and quick to determine on an annual basis, provided that banks and investment institutions can provide the necessary information to the tax authorities.

This is more difficult for the value development of real estate. The annual valuation via the WOZ comes too late for the attack. Van Rij says he is looking for other parties that can provide a more rapid estimate of the value increase (or decrease) of second homes (the first home will also fall in box 1 after 2025). The last bit of wealth (2.5 percent, or 12 billion euros) consists of cryptocurrencies, cash and annuities.

In a new system based on actual capital growth, the current exemption (the tax-free capital) of 50,000 euros per person will also expire, Van Rij writes. Instead, there will be a discount on the final tax to be paid, a so-called tax-free income. So much is already clear, but much is not yet.

For example, it still needs to be looked at how losses can be settled (over how many years they may be spread out). The rate at which the capital gains should be taxed remains uncertain for the time being. Van Rij mentions a number of options, ranging from a flat tax (a rate for everyone) to a progressive tax (the higher the capital gain, the higher the tax, comparable to income tax).

And then there are problems with Dutch people who have assets abroad, with everyday changes such as marriage and divorce, with inheritances and gifts and with the relationship between the new box 3 and the existing box 2. This ‘fun box’ for entrepreneurs now offers often cheaper options than box 3. It is not inconceivable that box 2 will also have to be tackled with the new way of taxing assets.